Umbrella Liability For Price Fixing: Does The Forecast Call For More Damages In The EU And U.S.?

A View from Constantine Cannon’s London Office

By Irene Fraile and Ankur Kapoor

The European Union may be on the verge of embracing “umbrella liability”—a theory of liability that would significantly increase the exposure of members of anticompetitive cartels.

The European Court of Justice is being urged by one of its advocates general to hold that, under EU law, victims of cartels can seek damages from cartel members for higher prices paid to non-cartel members that were able to raise their prices under the pricing “umbrella” created by the cartel. If the Court of Justice endorses such umbrella liability, antitrust liability in the EU could diverge from the approach evolving in U.S. courts which have been reluctant to embrace umbrella liability.

While claimants in the EU may have an umbrella for anticompetitive rain . . .

In an opinion delivered on January 30, 2014, Advocate General Juliane Kokott urged the Court of Justice to adopt the theory of umbrella liability in the case of Kone AG and Others. The Austrian Supreme Court referred the case to the Court of Justice for a preliminary ruling on the question of whether umbrella liability could be imposed on the members of an elevator cartel in Austria.

The Court of Justice’s advocates general assist the judges of that court by giving their opinions on legal solutions to cases before the judges deliberate. While opinions of the advocates general are advisory, they are often followed by the Court of Justice.

The present case stems from a leniency application by elevator manufacturer ThyssenKrupp, which led Austrian competition authorities in 2007 to fine elevator manufacturers Kone, Otis, and Shindler for joining in anticompetitive agreements to divide the market for elevators and escalators in Austria. An action brought in 2010 by Austria’s rail network ÖBB is now seeking damages amounting to more than 8 million Euros. ÖBB claims that, as a result of the cartel, it paid inflated prices for the elevators it purchased from both the cartel members and from manufacturers not party to the cartel.

Although Austrian national civil law excludes such umbrella liability, an Austrian court asked the Court of Justice for a preliminary ruling on whether, under EU law, “any person may claim from members of a cartel damages also for the loss which he has been caused by a person not party to the cartel who, benefiting from the protection of the increased market prices, raises his own prices for his products more than he would have done without the cartel (umbrella pricing) . . . .” In response to this question, Advocate General Kokott is recommending that the Court of Justice hold under EU law that cartel members can be held liable for umbrella-effect damages.

The advocate general opined that, under well-settled precedents, the principle of effectiveness of EU law requires that any individual must have the right to seek compensation for loss caused by a contract or by conduct liable to restrict or distort competition within the European internal market. It is necessary, however, for there to be a “sufficiently direct causal link” between the conduct and the harm. In other words, the harm must be a reasonably foreseeable result of the conduct.

In the opinion of Advocate General Kokott, “the fact that persons not party to a cartel set their prices with an eye to the market behaviour of the undertakings belonging to the cartel is anything but unforeseeable or surprising . . . .” According to the advocate general, this is particularly true in the present case due to the strong position of the cartel, which covered a significant proportion of the market. Moreover, cartel members will implicitly seek umbrella effects because “the more prices rise as a whole, the easier it is for cartel members to impose the prices they charge themselves on the market in the long run.”

The advocate general rejected the argument that damages caused by umbrella effects fall outside the scope of EU competition rules. On the contrary, “the full practical effectiveness . . . of [EU competition rules] would be adversely affected if it were not open to any individual to claim damages for loss caused to him as a result of infringements . . . of [such rules].” Even if this possibility could reduce the incentives of cartel members to apply for the competition authorities’ leniency programs, “sheltering cartel members from compensation claims . . . would serve only to compel other economic operators, especially customers who have suffered loss, to carry the financial burden of the cartel’s practices.” That would be “eminently unfair” and “create inappropriate incentives from the point of view of the effective enforcement of competition rules.”

Advocate General Kokott concluded that such a solution “does not mean that cartel members will automatically and in every individual case be required to provide compensation to customers of undertakings not party to a cartel,” but that this possibility should not be ruled out from the outset. After all, “it will always be necessary to carry out a comprehensive assessment of all the relevant circumstances in order to determine whether the cartel in the case in question has given rise to umbrella pricing.”

While the European Court of Justice must still decide whether to accept the legal reasoning of the opinion, the advocate general is undoubtedly correct that “[t]he Court’s judgment in this case will without doubt be ground breaking in the context of the further development of European competition law and, in particular, its private enforcement.”

. . . plaintiffs may get wet in the U.S.

On the other side of the Atlantic, however, recent federal precedents have taken the opposite view under U.S. antitrust law, and have held that antitrust plaintiffs suing a cartel for damages may not recover for purchases made from entities outside the cartel.  However, the issue has received little attention from the U.S. Courts of Appeals and no attention from the U.S. Supreme Court.

Recent decisions in federal district courts have reasoned that “the damages for an umbrella plaintiff would be unacceptably speculative and complex” because of the “wide range of factors [that] influence a company’s pricing policies.”  Antoine Garabet, M.D., Inc. v. Autonomous Techs. Corp., 116 F. Supp. 2d 1159, 1167-68 (C.D. Cal. 2000) (internal quotations omitted). Thus, “[t]he outcome of any attempt to ascertain what price the defendants’ competitors would have charged had there not been a conspiracy would at the very least be highly conjectural.”  Id. at 1168.  In other words, the non-cartel members’ independent pricing decisions constitute intervening causes that break the chain of causation from price fixing to higher prices.

These cases have grounded their rejection of umbrella liability in the reasoning of Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983) (“AGC”).  AGC establishes a multi-factor test for determining whether an antitrust plaintiff has “antitrust standing” to sue: whether the plaintiff’s injury is of the type the antitrust laws were intended to redress; the directness of the injury; whether damages are speculative; and the risk of duplicative recovery and concomitant complexity in apportioning damages among multiple injured entities.  Antoine Garabet, M.D., Inc., 116 F. Supp. 2d at 1166.  Courts have held that the intervening pricing decisions of non-cartel members render the chain of causation too indirect and attenuated, and therefore the damages too speculative, under AGC. Id. at 1168-70.

In sum, while the EU advocate general’s position is that umbrella liability may be imposed where there is a “sufficiently direct causal link” between the conduct and the harm, i.e., that the harm was reasonably foreseeable, recent U.S. case law has taken the position that umbrella effects are inherently indirect and speculative.  In light of the advocate general’s strong statements that, at least in the elevator cartel, umbrella effects were “anything but unforeseeable or surprising,” and that the cartel members sought to raise prices market-wide, the outlook for expanding cartel liability appears more certain in the EU than in the U.S.  This could lead to significant differences in the damages available to antitrust claimants in the EU versus the U.S.

However, some U.S. precedents leave open the possibility of establishing umbrella liability where there is a strong chain of causation akin to a mathematical relationship. For example, in the case of In re Online DVD Rental Antitrust Litigation, 2011 WL 1629663, at *9 (N.D. Cal. 2011), the court held that plaintiffs had failed to establish umbrella liability because they “fail[ed] to demonstrate that Netflix pricing truly ‘set’ or determined Blockbuster pricing, as a function of any interdependent market interaction, as opposed to simply a likely function of the competitive dynamics of the marketplace.”

Given the differing—yet by no means settled—approaches to umbrella liability that are developing in the EU and the U.S., litigants in cartel cases should look carefully at whether such liability has the potential to be a factor in their cases. The approach taken to umbrella liability is likely to have a substantial impact on the amount of damages at issue in cartel cases.

— Edited by Gary J. Malone